Countrywide Q2 Review

Quarterly Market ReviewSummer 2014

A decade of housebuilding in Europe Banks tighten lending criteria The art of compromise 42

4/5 www.countrywide.co.uk

COUNTRYWIDE QUARTERLY MARKET REVIEW Q2 2014

ContentsWith Help to Buy never far from the headlines, this quarter Countrywide plc looks at where those buying through the scheme come from and the types of mortgage products they’re using.

Countrywide plc’s Q2 2014 Quarterly Market Review also looks at the number of homes built across Europe over the last decade, the impact of the £500,000 loan to income cap introduced by major banks and how rising house prices are driving first time buyers to cheaper areas of the country.

Countrywide plc is the UK’s largest property services group, operating the UK’s largest estate agency and lettings network of circa 1,300 branches under 52 high street brands. The group has a wide reaching scale with branches in locations from Stirling to Penzance.

Countrywide plc sells 1 in 11 houses in the UK and is the third largest mortgage distributor in the UK with just below a10% share of the intermediary mortgage market. The Group is also the UK’s largest transactional conveyancing business by completions, the UK’s largest land and new homes agency and a leading provider of residential valuations and surveys, accounting for circa 30% of all residential mortgage valuations in the UK.

As the UK’s largest integrated residential and commercial property services group, Countrywide plc has a unique perspective on the UK property market and is truly countrywide.

_ 04 | Countrywide plc’s market barometer

_ 06 | Who’s using Help to Buy?

_ 08 | Five slide story of the market

_ 10 | A decade of housebuilding in Europe

_ 12 | Banks tighten lending criteria

_ 14 | The art of compromise

ABOUT COUNTRYWIDE PLC:

Countrywide plc, the UK’s largest integrated property services Group, including the largest estate agency and lettings network, operates more than 1,300 associated branches across the UK.

Countrywide plc’s network of expertise helps more people move than any other business in the UK and is a leading provider of estate agency, lettings, mortgage services, land and new homes, auctions, surveying, conveyancing, corporate property management services and commercial property.

Countrywide plc’s award-winning service has earned the business over 150 high-profile industry awards in the last five years, with customers voting Countrywide Best Large Chain National category, at the 2013 ESTA awards. Our Land & New Homes team was named the UK’s Best New Homes Agent for two consecutive years at the Estate Agency of the Year Awards 2012 and 2013 and Countrywide Surveying Services won the award for Best Anti-Fraud Measure at the Mortgage Finance Gazette Awards 2013.


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Market barometer: A question of supply and demand

The Countrywide barometer is based on supply and demand information generated from Countrywide plc’s circa 1,300 estate agency and letting branches. It provides a solid indicator of current market activity and future sentiment.

BUYERS TO SELLERS AND TENANTS TO LANDLORDS

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Q2 2014 saw a degree of cooling in the housing market although there are still far more buyers and far fewer properties available than 12 months ago.

The increase in demand in the first quarter of the year led to large price rises across the South of England. While it may have taken some time, Countrywide plc is now beginning to see a larger number of people looking to sell, a trend which has begun to alleviate some of the upward pressure on house prices.

Demand in the rental sector, alongside growth in rents, has remained strongest across the south of the UK. Economic growth has seen jobs created at the fastest rate for four decades, with demand for rental accommodation highest in areas where large numbers of jobs have been filled by relocating professionals from across the UK or Europe.

BUYERS TO EACH NEW SELLER

9.9Q2 2014

PROSPECTIVE TENANTS PER NEW PROPERTY

6.5Q2 2014

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COUNTRYWIDE QUARTERLY MARKET REVIEW

hile government data shows that around 80% of purchasers using the Help to Buy scheme are first

time buyers, little more is known about their path onto the housing ladder. First time buyers come in many shapes and sizes, and buyers using the Help to Buy scheme are no different. They represent a healthy cross section of those struggling to get onto the housing ladder today.

Countrywide plc data shows the largest group of purchasers has come from the private rented sector. 55% of people who have bought a house using Help to Buy have come from the private rented sector, higher than the average among first time buyers in general. This figure rises to 65% in London where the sector forms a larger proportion of households.The private rented sector is diverse and houses a wide range of people. While the income of the average buyer moving from privately rented accommodation is £41,000, over a third of renter house-holds earn less than £30,000. There has been a particular bias towards lower income renters in London and the South East where 40% of those renters using the scheme earn under £30,000.

Those living with family (30%) form the other central part of demand. These are households unable to access the private rented sector due to the cost of rent, or are unwilling to do so due to a desire to save more quickly for a deposit. As a consequence, they tend to be younger than average, earning 16% less than those living in the private rented sector. Half of these are single person house-holds, which might be expected given their early life stage, but means housing costs take up a larger proportion of their income. In the majority of cases these

W

Who’s using Help to Buy?

Q2 2014

choose from. Before the start of the Help to Buy Mortgage Guarantee scheme there were around 50 95% loan-to-value mort-gage products, compared to 200 today. Just over half are backed by the scheme, with a growing number of mortgages of-fered independently – a sign that lenders can operate effectively in a post Help to Buy market. Given the qualifying criteria of the scheme - a 5% deposit - the lend-ing profiles are similar. The difference in interest rates offered by lenders using the two parts of the scheme is reflective of the lending profile of the two schemes and the risk perceived by lenders. While buyers using the Equity Loan element in effect have a 25% deposit, under the terms of the Mortgage Guarantee lenders pay the government 0.9% of the loan amount to guarantee the mortgage for 7 years, the cost to borrowers therefore is higher.

With similar lending profiles, any change in interest rates will have a similar effect on the mortgage repayments of the majority of people buying through the scheme (65% of buyers using each part of the scheme borrow at a rate within a 0.5% range). The average household using the Help to Buy scheme spends 29% of their take home pay on mort-gage repayments - those using the Mortgage Guarantee are paying a slightly higher proportion despite higher aver-age incomes. By way of comparison, the average first time buyer purchasing inde-pendently of the scheme in 2014 spends a quarter of their take home income on mortgage payments. With only a 5% de-posit, the mortgage repayments of those using the Help to Buy Mortgage Guar-antee scheme are clearly higher than those able to put down a larger deposit, meaning a higher income is needed to make repayments affordable.

With the Bank of England hinting inter-est rates will rise as the recovery takes hold, the impact will be felt by millions of mortgage holders. While 95% of Help to Buy backed mortgages are on a fixed rate for two years or longer, the impact of a rate rise will eventually be felt. A 2.5% rate rise would see the average house-hold spend 36% of their take home pay on repayments, up from 29% – but still

Help to Buy is enabling a growing number of households to realise their aspirations of homeownership

are new households which were wait-ing to form – saving for a deposit while paying reduced or no rent.

While the use of the scheme by existing homeowners is perhaps less politically acceptable, the scheme has provided a lifeline to many homeowners in parts of Northern England where falling house prices have eroded the equity held by many homeowners. For first time buyers in parts of Northern England who bought in 2006 or 2007, Help to Buy has helped households move after negative equity has prevented many from moving. In the North East almost 30% of homes bought through the scheme have been pur-chased by existing home owners.

Households using the Help to Buy scheme have enjoyed an increasing number of high loan to value mortgage products to

Average proportion of take home pay spent on mortgage repayments

well within what is deemed affordable by lenders. With most lenders introducing the stress tests required by the Mortgage Market Review prior to its formal intro-duction, the majority of borrowers using the Help to Buy scheme have already proved they are able to comfortably afford a rise in interest rates.

Fears that the Help to Buy scheme would allow households to borrow money which they couldn’t repay to buy houses they couldn’t afford have been waylaid. Mortgage repayments remain no less affordable than to the average first time buyer and new owners look well placed to ride out any rise in interest rates. Buyers have almost exclusively come from groups which are beginning to receive considerable political atten-tion given their rapid growth, as rates of home ownership among the young have gone into reverse.

With a General Election looming, Help to Buy seems likely to feature prominent-ly on the political agenda. While there has been criticism of the scheme from a number of political commentators, among aspiring homeowners which form an increasingly large sector of the elec-torate, Help to Buy remains a remarkably popular policy.

EQUITY LOAN

MORTGAGE GUARANTEE

Source: Countrywide plc 2014

Given that the scheme is funded by the Government, it is important that those using it would otherwise find it difficult to buy unassisted. So far this has been the case, with the majority of purchasers coming from the private rented sector or the parental home with below average incomes

At current rates

2.5% rise in interest rates

28%

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37%

Lending profile of the Help to Buy Schemes

Help to Buy Mortgage Guarantee


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Profile of those using the Help to Buy scheme


Tenant

Living with familyCurrent owner

55%Tenants

Average household income: £41,000

Older households (40+): 18%

Low income households (<£30k): 33%

30%Living With Family




15%Current owner




Help to Buy Equity Loan



All you need to know about the housing market in five simple charts

The five slide story of the market

With stock at a premium, the number of newly registered buyers gives an indication of changes in demand. In Q2 2014 the number of registered buyers was 34% higher in comparison to Q2 2013 - the largest jump in six years. There are signs however that this surge in demand is gently beginning to cool. Between June 2013 and June 2014 the number of buyers registering rose 26%, which while a considerable rise, it does represent a slowdown in the rate of growth.

In 2013, price rises in London were driven by a shortage of available stock. However there are strong signs that this is beginning to change in 2014. Outside London, the first half of 2014 has seen levels of supply remain tight.

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Growth in registering buyers

Year on year change in number of properties on the market

The number of viewings taken to agree a sale is highly seasonal. The first few months of the year are traditionally associated with new buyers entering the market. New, would-be buyers tend to view a larger number of properties before purchasing. With fewer properties on the market alongside a growing number of buyers, a fall in the number of viewings required to agree a sale represents evidence of buyers increasingly willing to compromise.

The rise in the proportion of asking price achieved is an indicator of future market sentiment rather than one of market strength. Over the last 12 months, the difference between asking and achieved price narrowed by 1.1% to 98.6%. In a rising market sellers will generally raise asking prices. If buyers are willing to meet these prices, the differential between asking and achieved price will narrow. If however, asking prices rise faster than what buyers are willing to pay, the proportion of asking price achieved will begin to fall.

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Market Appraisals

Viewings to agree a sale

Percentage of asking price achieved

While the number of properties available for sale across much of London and the South East remains down year on year, there are signs that this is changing.

Rising house prices are driving a raft of new sellers onto the market.Countrywide plc carried out 24% more market appraisals in June 2014 in comparison to June 2013.

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2014 Market Appraisals

- Smith Street, London

- Ashley Avenue, Oxford

- Times Terrace, Leeds

- Portland Place, Sheffield

- Curzon Corner, Newcastle

- Merville Mansions, Chester

- Limes Lane, Cambridge

- Clive’s Close, Liverpool

2013 Market Appraisals

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New buyers traditionally start looking for a home in the spring, viewing multiple properties.

Sales made at the end of the year tend to be concluded with fewer viewings. Fewer first time buyers and sellers are in the marketplace.

Early 2014 saw almost no seasonal slowdown, with the number of viewings per sale falling to a record low.

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House building has rarely been higher on the political agenda and it seems likely that the 2015 election will become a num-bers game – with the three main parties all pledging to increase the number of homes built. While targets tend to be based on the number of homes built domestically, analysis of house building rates across Eu-rope shows that house building in the UK has long lagged our European neighbours.

Both pre and post recession, the UK has consistently been building amongst the fewest homes in Europe taking into account population size and growth. Per head of population, and taking into account rates of growth, the UK builds the 3rd fewest new homes – 1 for every 2.5 new people. The recession, while reducing the number of homes built, hasn’t changed the UK’s rela-tive position in Europe, with house building falling by similar rates elsewhere. Only Switzerland and Luxembourg, with smaller populations and the highest average house prices in Europe, build less. While levels of

A decade of house building in Europe

portion of homes required for future years. In 2007 Spain alone built more houses than the UK, Germany, Greece, Belgium, Portugal, Sweden and Denmark combined.

Pre-crash levels of house building have been used by governments as a bench-mark of the number of homes that should or could be built in the UK. The downturn in construction however should not disguise the fact that the UK has failed to build the required number of homes over an extended period of time. In reality, many European countries have been better at building more homes over much longer periods. A lack of house building has meant that the UK was among the least well prepared countries to deal with any fall in house building. In 2008, house building fell by around 30% in the UK, exactly in line with the fall across Europe. The difference between the UK and much of Europe is that while Europe was busy building houses during the late 1990s and early 2000s, in the

past 20 years the UK has never built large numbers of homes. While compar-isons are frequently made to the 1930s and 1960s when the UK was building 250,000+ homes annually, the reality is that Britain has changed significantly over the following 50 years. If the government is serious about delivering the number of homes the UK needs, it should look to our European neighbours rather than to the 1960s for ways of doing it.

The UK needs to look to Europe rather than the past to increase house building

house building are the product of national economies, countries can be grouped by their ability to build new homes. Much of Northern Europe is characterised by low but stable levels of delivery, alongside moderate population growth, a group which the UK falls into. Central and East-ern Europe have seen medium to high levels of new development which has consistently delivered large numbers of new homes over the past decade. France, with a similar population to the UK, built an average of 375,000 homes annual-ly over the past 10 years. While house building may have fallen by a similar rate to the UK, the French are still delivering 300,000+ homes a year. Finally, levels of house building in Southern Europe have proved extremely volatile. Large numbers of new houses built pre-2007 have given way to very low levels of house building post crunch as falling house prices made development unviable. Each year between 2003 and 2007 Spain built more than 500,000 homes, equating to a a high pro-

Average number of homes built annually (2004 - 2013)

Population growth per home built (2004 – 2013)The number of homes built in the UK in 2013

Population:

Population:

139,950

146,122The number of homes built in Poland in 2013

Source: ONS and Central Statistical Office Poland 2014

Source: Countrywide plc 2014, European Government data 2014

Source: Various European statistical agencies 2014

Increase in completions

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CHANGE IN COMPLETIONS (07-13)

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45,000

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70,000

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27,000

29,000

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51,000

143,000

50,000

47,000

204,000

376,000

421,000

180,000

BY NUMBERS

VOLATILE DELIVERY - SPAIN

At its peak in 2006 almost 20% of Spanish GDP growth came from the construction industry, more than twice the amount in the UK. 1 in 8 of the working population was directly employed in construction. The Spanish planning system, unlike the UK system, is based on the principle of zoning. This gives developers a high level of certainty when buying land. Developers knew if schemes conformed to certain size, height and space standards, planning permis-sion would almost certainly be granted.

HIGH DELIVERY – FRANCE

The French planning system is based on the PLU, a form of development plan. It sets out the sort of development required and where it should happen. The PLU covers an area of around 1,550 people – the smallest plan area in Europe. In comparison, the lowest level of planning in the UK is at Local Authority level which covers an average of 122,000 people. Given the plan covers just 1,550 peo-ple, development plots tend to be small and therefore more suitable for smaller developers and individuals. Latest data from the French government shows that around 40% of houses built in the last 12 months were built by individuals, around eight times the UK average.

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Over the last decade the UK has built one home for each 2.5 new people…

…while France has built a home for every 0.9 new people.

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www.countrywide.co.uk

Q1 2013

The decision by Lloyds Banking Group and Royal Bank of Scotland (RBS) to impose a maximum household loan to income (LTI) multiple of four to lending over £500,000, came just weeks before George Osborne legislated to allow the Bank of England to “direct” to lenders how much people taking out larger loans are able to borrow. While highly geared lending might seem safer than it was now that the economy is picking up speed, the fact that the economy is recov-ering means that the point at which interest rates begin to rise moves closer. It is the most highly geared borrowers who are most vulnerable to rising rates, so a decision to limit lending to this sector seems prudent.

The £500,000 limit set by Lloyds and RBS means that it’s really only highly geared lending in London that is choked off. A loan to income ratio of four at £500,000 implies a household income of £125,000 which is about 44 per cent higher than the combined mean gross average earnings of a male and female working full time in London. So the policy is less restrictive than it seems and will hit only those at the higher end of the price distribution.

Lloyds and RBS have a large market share, so the policy undoubtedly sends a cau-tionary message to the market as a whole. New legislation from the Chancellor doesn’t necessarily mean much will change. The Bank of England’s Financial Policy Commit-tee already has powers to recommend such limits, but it does undoubtedly send out a strong signal.

Lenders are already aware of the risks associated with deteriorating affordability and the increased vulnerability of highly geared borrowers. The number of mort-gage applications failing lenders’ tests has already been increasing according to the Bank of England’s credit conditions survey. In the first quarter of 2014, a much bigger proportion of lenders reported a reduction in the numbers of mortgage applications being approved than they expected just three months earlier. Looking ahead, one quarter of lenders expect that there will be a fall in the numbers of approved applications showing that there is a clear expectation that affordability terms and conditions are biting much harder.


Banks tighten lending criteria

A number of major lenders have introduced a maximum loan to income ratio for mortgages over £500,000 – but will its impact be felt?

12/13

Credit condition changes

Proportion of transactions affected by a £500,000 lending cap

£87kAverage earnings of a male and female couple working full time in London

NORTH EASTAverage house price: £99,313Affordability limit: £302,211Affected transactions: 5%

NORTH WESTAverage house price: £109,042Affordability limit: £305,336Affected transactions: 7%

YORKSHIRE & HUMBERAverage house price: £116,993Affordability limit: £295,225Affected transactions: 7%

WALESAverage house price: £113,275Affordability limit: £291,190Affected transactions: 6%

WEST MIDLANDSAverage house price: £113,532Affordability limit: £306,681Affected transactions: 9%

SOUTH EASTAverage house price: £221,189Affordability limit: £405,989Affected transactions: 16%

SOUTH WESTAverage house price: £179,066Affordability limit: £306,307Affected transactions: 17%

EAST MIDLANDSAverage house price: £127,384Affordability limit: £299,397Affected transactions: 8%

EAST OF ENGLANDAverage house price: £184,980Affordability limit: £366,054Affected transactions: 15%

LONDONAverage house price: £414,490Affordability limit: £430,679Affected transactions: 35%

10%

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-10%

-20%

-30%

-40%

More Than 20%

15% - 20%

10% - 15%

7% - 10%

Less Than 7%

Source: Bank of England 2014

A

A

B

E

C

B

D

F

H

C

ID

J

E

G

F

I

G

H

J

Q1 2014

Next 3 Months

-12

%

-25

%

19

%

-40

%

-10

%6

%

Ap

pro

ved

ap

plic

atio

ns

Cre

dit

sco

rin

g

Qu

alit

y o

fap

plic

atio

ns

Greater LondonHAMMERSMITH & FULHAM

Average house price: £696,344Affordability limit: £549,728Affected transactions: 59%

CAMDENAverage house price: £735,454Affordability limit: £545,840Affected transactions: 62%

BRENTAverage house price: £374,643Affordability limit: £353,152Affected transactions: 61%

WESTMINSTERAverage house price: £908,786Affordability limit: £793,963Affected transactions: 53%

KENSINGTON & CHELSEAAverage house price: £1,269,897Affordability limit: £824,412Affected transactions: 54%

K

L

M

N

P

Source: Hamptons International and Countrywide plc 2014

K

P

N

LM

More Than 50%

40% - 50%

30% - 40%

20% - 30%

Less Than 20%

The £500k Loan to Income cap imposed by Lloyds and RBS will effectively only choke off highly geared lending in London, but existing affordability constraints are already beginning to bite

FIONNUALA EARLEY DIRECTOR OF RESEARCH HAMPTONS INTERNATIONAL

*based on local earnings


The term ‘renty somethings’ was coined to describe the growing number of young peo-ple in their 20s and increasingly 30s who are living for longer in the private rented sector. With a growing private rented sector, over half of the population now live in rental accommodation in the centre of most larger cities. At the same time however, research has consistently shown the appetite for homeownership remains strong amongst the young. While for many renting is a ques-tion of flexibility, for others it is a question of finances. The result has been first time buyers showing increasing willingness to compromise to get onto the housing ladder, a trend which has benefited some of the UK’s more deprived inner city areas.

The private rented sector has long allowed tenants, particularly in more expensive areas of the country, to live in areas where they otherwise might not be able to afford to buy. Typically this is in a central location, close to the centre of a city and their place of work. For those looking to buy a home for the first time however, a degree of compromise has always been required.

As house prices have risen, first time buyers have shown an increasing willingness to buy in cheaper areas in order to get onto the housing ladder. Analysis by Countrywide plc shows that in the first half of 2014, the average first time buyer in the UK bought a home in an area which is 10% cheaper than where they were living previously. Rising house prices over the last 12 months mean that this figure is up from 6% on 2012.

The effect has been most pronounced in the most expensive areas of the country where the cost of renting relative to buying is lowest. Taking London as a whole, the av-erage first time buyer chooses to live in an area 16% cheaper than where they rented. This figure is up from 10% in 2012 as rising house prices have outstripped rents. In the most expensive parts of London, the South East and Edinburgh, first time buyers typi-cally live in areas up to 50% cheaper than where they previously rented.

The impact of this in London, and other cities with growing populations, has been to push first time buyers outwards into more peripheral areas where house prices tend to be lower. While in London, out-

The art of compromiseRising house prices are increasingly driving buyers to cheaper areas

www.countrywide.co.uk14/15

Difference in price between areas where first time buyers bought and rented previously

Origin of first time buyers

Number of renters moving into homeownership

250,000

200,000

150,000

100,000

50,000

19

99

/00

20

00

/01

20

01/0

2

20

02

/03

20

03

/04

20

04

/05

20

05

/06

20

06

/07

20

07/0

8

20

08

/09

20

09

/10

201

0/1

1

201

1/1

2

201

2/1

3

Source: English Housing Survey 2013, 2000 - 2013

er boroughs have a larger proportion of first time buyers purchasing in the same borough in which they rented, the last 12 months has seen this proportion fall across London. Eight or nine years ago Hackney, in East London, began to attract buyers priced out of more central areas. A com-bination of Victorian housing stock, lower house prices, new transport infrastructure and a reversal of the 1960s trend of leav-ing the inner city for suburbia, has meant house prices have soared. The speed of change is remarkable: Land Registry data shows that house prices in Hackney have risen 108% over the last 10 years while prices across the capital grew 57%.

Hackney’s housing market is now closely intertwined with that of the rest of London’s in contrast to that of poorer Boroughs fur-ther east such as Barking and Dagenham. 57% of first time buyers in Hackney came from Central or West London in the last 12 months, the largest proportion in any East London Borough. This influx of new buyers from across London has meant Hackney has changed significantly in the last 10 years. In 2004, government data showed that Hackney was the single most deprived Local Authority in England and Wales. While the indices of deprivation won’t be updated until 2015, Hackney will almost certainly have relinquished ‘top’ spot.

Hackney is however just one example of an area which has become the destination of choice for buyers priced out of central, more expensive locations. The repopulation of the inner city since the 1980s has been led by first time buyers and young profes-sionals who were attracted by the low cost of housing.

From Hove near Brighton to Didsbury in Manchester, our inner cities have changed significantly over the last 30 years. As a result people choosing to move to inner city areas today are increasingly doing so for reasons of lifestyle rather than cost. House prices in many inner city areas are now higher than in their suburban coun-terparts, having over taken them during the mid-2000s. While the desire for inner city living remains strong, rising prices may once again force first time buyers to begin looking elsewhere for cheaper options.

The repopulation of the inner city since the 1980s has been led by first time buyers and young professionals who were attracted by the low cost of housing.

HARROW

34%

19%

15%

81%

85%

66%

EALING

HACKNEY

Proportion who previously lived in the Borough

BARKING AND DAGENHAM

GREENWICH

17% 83% 24% 76% 4% 96%

CROYDON

London

Outside London

-3% to 0%

-6% to -3%

-9% to -6%

Less than -9%

More Than 50%

45% - 50%

40% - 45%

35% - 40%

Less Than 35%

The 2007 downturn had the effect of restricting

the availability of mortgage finance

The number moving from the rented sector into

home ownership has recovered faster than

transactions overall


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Countrywide Q2 Review

Real Estate

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